profit

All posts tagged profit

Crash - WCP 2014

 “How important is profit?” this question in one form or another is one of the most common questions we receive from start-up owners or potential start-ups and surprisingly it’s not a simple answer.

Some time ago I sat down for a chat with a highly intelligent friend who had recently joined the board of a mid-sized family company. “I just don’t get it” she said “everyone tells me the business is booming, sales are up, profits are up yet from what I read the company is broke”.

My friend had sat down with the half year results and looked at the first two quarters performance against budget. Revenues were up by around 35%, Gross Margin was tracking, as a percentage, around 5% better than budget and operating expenses were around 11% lower than budget leaving a very healthy EBIT compared to budget and management applauding themselves all round.

Where is the problem? I hear you ask.

Cash or rather the lack of it was the problem. As revenues and revenue projections grew the funds allocated to the raw materials and finished goods needed to service such growth had increased exponentially as had the debtor’s ledger.

Yes the business was producing more at lower cost and selling every item produced at a profit but amongst the excitement no one had calculated the impact on future cash flows.

If you achieve an EBIT of 20% (which is on the generous side) it means you have to outlay costs, in advance, of at least $0.80c in every dollar of anticipated revenue. You may offset this to some extent by negotiating an extension to trading terms with your creditors but that is a very slippery slope and best avoided.

If you sell your product to a major retail chain, they will look to pay you in 60 days from the end of the month in which you invoice them. So you could easily wait 60 to 90 days for payment. For every $10 of widgets you sell them each month your cost is $8 and if you carry that and the subsequent monthly sales until you are paid, you are out of pocket by $24 before you receive a cent. On top of which you have had to lift your finished goods to 60 days stock to meet varying demand and raw materials by 45 days so you are roughly $50 out of pocket as you wait for the $10 to be paid of which you retain $2 profit or EBIT.

Yes you are still profitable but your short term cash burn is exceeding income and without a rethink your fast growing, profitable enterprise is going to crash.

“A profitable business without a cash flow is dead in all but name!”

My friend could see where the company was heading whilst the sales manager was elated by high revenues, the production manager proud of the COGS and the operations manager satisfied by the low level of OPEX. In all businesses good cash flow management and budgeting is essential.

There were several funding options available to secure this company’s future once the threat was identified. But within 60 days the company may have been in turmoil and no funder wants to lend into a panic.

So in answer to the question; profit is very important but it is just one of what I call “The Four Pillars of Business”: Revenue, Cost, Profit and Cash; and always remember that whilst the first three are very important CASH IS ALWAYS KING.

_________________________________________________________________________

By, Neil Steggall

 The Barking Mad Blog

Business Advice with Bite

http://wp.me/p401Wv-iL

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High Profits & About to Crash?

A relevant question for SME Management.

“How important is profit?” this question in one form or another is one of the most common questions we receive from new SME owners or potential start-ups and surprisingly it’s not a simple one to answer.

Some time ago I sat down for a chat with a highly intelligent friend who had recently joined the board of a mid-sized family SME. “I just don’t get it” she said “everyone tells me the business is booming, sales are up, profits are up yet from what I read the company is broke”.

My friend had sat down with the half year results and looked at the first two quarters performance against budget. Revenues were up by around 35%, Gross Margin was tracking, as a percentage, around 5% better than budget and operating expenses were around 11% lower than budget leaving a very healthy EBIT compared to budget and management applauding themselves all round.

Where is the problem? I hear you ask.

Cash or rather the lack of it was the problem. As revenues and revenue projections grew the funds allocated to the raw materials and finished goods needed to service such growth had increased exponentially as had the debtor’s ledger.

Yes the SME was producing more at lower cost and selling every item produced at a profit but amongst the excitement no one had calculated the impact on future cash flows.

If you achieve an EBIT of 20% (which is on the generous side) it means you have to outlay costs, in advance, of at least $0.80c in every dollar of anticipated revenue. You may offset this to some extent by negotiating an extension to trading terms with your creditors but that is a very slippery slope and best avoided.

If you sell your product to a major retail chain, they will look to pay you in 60 days from the end of the month in which you invoice them. So you could easily wait 60 to 90 days for payment. For every $10 of widgets you sell them each month your cost is $8 and if you carry that and the subsequent monthly sales until you are paid, you are out of pocket by $24 before you receive a cent. On top of which you have had to lift your finished goods to 60 days stock to meet varying demand and raw materials by 45 days so you are roughly $50 out of pocket as you wait for the $10 to be paid of which you retain $2 profit or EBIT.

Yes you are still profitable but your short term cash burn is exceeding income and without a rethink your fast growing, profitable enterprise is going to crash.

My friend could see where the company was heading whilst the sales manager was elated by high revenues, the production manager proud of the COGS and the operations manager satisfied by the low level of OPEX.  In all business management not just SME’s good cash flow management and budgeting is essential.

There were several funding options available to secure this company’s future once the threat was identified. But within 60 days the company may have been in turmoil and no funder wants to lend into a panic.

So in answer to the question; profit is very important but it is just one of what I call “The Four Pillars of Business”: Revenue, Cost, Profit and Cash; and always remember that whilst the first three are very important CASH IS KING. 

Neil Steggall

The Barking Mad Blog

SME Advice with bite!

http://wp.me/p401Wv-9D

The Three Profits of SME's WCP 2013

The Three Profits of SME’s

 

Most SME operators tend to think that good management, innovation, hard work and productivity will result in a profitable business, well they should but that’s not the whole story.

Not all profits are created equal and indeed some are much more valuable and more quickly and easily attained than others. Ah there must be a catch I hear you say; there is no catch but understanding the Three Profits of SME will make a significant difference to the way in which you view and manage your business.

The First Profit

The First Profit of SME is the easiest profit you will ever make and could account for a substantial amount of the total profit your business generates over its lifetime. The First Profit flows directly from your cost of entry.

Once you decide on starting or buying a business be it a hardware shop, bakery, call centre, IT service or a property development, do your research. Look around for a similar business in distress or even facing or in administration or receivership. There are many reasons businesses fail but most often its insufficient cash or poor management, if you are a good manager and you have cash get out there and buy well.

Most businesses fail within the first two to three years. I have bought near new businesses out of distress for less that 10% of the cost of establishing that business. Plant and equipment as new, some customers in place and ready to go. If you can run that business and cash flow it you make a 900% profit in your first 2 years because well run the business should be worth at least its true set up costs.

The Second Profit

This is the only profit some people think of; the operating profit that flows from good management, business planning, innovation, hard work, productivity and sales effort. The Second Profit most importantly sustains your cash flow, pays the bills, allows you to further develop the business and should leave you with a healthy profit after drawing your wages.

The real key to the just how large The Second Profit is relates to the lessons of the First and Third Profits. Put simply the keys to strong operating profits are how well you control the cost of the goods and services you offer and how well you price them.

Do the maths. You are much better off and your business is stronger selling a lower number of products or services at a higher margin than going for volume at a discount.

Look for ways to offer a significantly better service to your customers than your competitors are and lift your prices. Treat cost controls and buying as seriously as sales, manage your stocks to achieve maximum stock turn at minimum inventory. Establish and monitor your KPI’s. Motivate and reward your staff. Build a happy and united team.

The Third Profit

This Third Profit if planned carefully and executed well will bring you a profit as relatively easy and large as your First Profit. We are talking here of your exit strategy, the day you sell your business. Whilst this seems a long way off when you start your business you should be planning and working towards the exit every day.

The Third Profit will directly reflect the desirability of your business to a potential buyer. That buyer will need to be very comfortable with your business if you are looking for a premium priced exit.

From day one work to a detailed financial budget and business plan, report against it monthly; draw up detailed monthly accounts, (it’s so easy today), hold monthly board meetings with an agenda and minutes, even if the directors are you and your wife. File all tax returns and corporate documents on time and constantly update your corporate register. Imagine how comforting 3, 5 or 10 years of such well-maintained records are to a potential buyer.

Lock as many customers as you can onto long term supply or service contracts and do the same with your key suppliers. Look after, reward and motivate your staff so that your retention rate will be high. Another three prospective purchaser concerns answered.

Typically a purchaser will offer a multiple of earnings (EBIT) plus stock at valuation as a pricing mechanism. If the accounts, customers and staff look ad hoc the multiple offered is going to be between 1 and 2 times earnings and stock over one year old will be discounted to $0.10 in the $1.00 and over six months old $0.50 in the dollar.

With solid accounting, tax and corporate records, good budgeting, a regular stock turn, sound supplier and customer relationships, and loyal staff a potential purchaser is going to look much more favourably on your business and a multiple of 4 to 6 times EBIT plus SAV at full cost is a likely outcome.

Another strategy is to approach your major competitor; a consolidation of the two businesses could bring about significant efficiencies and cost benefits thereby lifting to value of your business to a multiple of 6 to 8 times EBIT.

I hope you take on board The Three Profits and prosper from them. Good Luck!

Neil Steggall.

The Barking Mad Blog

SME Advice with bite!

1 November 2013

http://wp.me/p401Wv-8E

 

www.wardourcapital.com

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entrepreneurs

Creating an Entrepreneur!

Is it possible….you better believe it!

 

Entrepreneurs are often the rocket fuel which drives new ideas, creates new businesses and indeed new industries. In common with such inflammable fuels entrepreneurs can often end with a bang but overall they have driven commerce and commercial ideas for millennia.

Most entrepreneurs tend to be highly individual, difficult and unpredictable and lacking in reputation when it comes to team work and the subtleties of the office culture. This is changing as most business schools and universities are turning out graduates with qualifications in entrepreneurship.

Having tame yet empowered entrepreneurs within a company is the dream for most business owners. These are employees who will undertake something new, without being asked to do so. They are innovative and creative – they are people who can transform an idea into a profitable venture for your business. They strike the perfect balance – act like entrepreneurs, but they work for you.

But as any business manager will know, such individual entrepreneurs are a rarity, however, this needn’t be the case. Every employee can become more creative and entrepreneurial if their company adopts a different approach to their development and cultivates a culture where innovation and creative thinking is encouraged and supported.

One of the main problems facing many Australian businesses is that they have lost sight of the importance of fostering creative thinking and innovation. In doing so, they are placing their business at risk and giving the competition a serious advantage.

We can’t lose sight of the fact that the economic crisis has turned many offices into high pressured working environments, where employee engagement and confidence has been eroded. In such businesses energy, creativity and innovative thinking has been lost.

However, what has also emerged is a (it’s not us) blame culture where business people are blaming their current poor business performance solely on the recession and external factors. But this is a bit like complaining that you are wet because it’s raining. How about wearing a raincoat? Businesses have a duty to prepare for the future upturn and ramp up their competitiveness.

The actual ‘raincoat’ for business is not to cut costs and act in defence; it is to build resources and attack. Sun Tzu in the sixth century said that you may survive though defence but you can only win by attacking. One of the oddest paradoxes of the business world is how many business owners never even see themselves in a competitive situation. Absurd! Competition in so many forms is ever present and can never be ignored.

So what can businesses do to be more competitive? It is in times of adversity that some of the greatest innovations have appeared and in today’s straightened times there is a healthy pressure to differentiate, become more competitive and establish more intrinsic value in the organisation. Does this come about by exhortations by the CEO or by establishing a culture of freedom to think and innovate? It may be the former but it must be the latter.

It is down to business managers and the HR department to establish a culture where intellectual power within the company is harnessed to the betterment of innovation and in so doing equals motivation, productivity and profits. An energised workforce is an effective and content one.

Most people in an organisation have enough insight of what is going on to be able to contribute to innovation. However, we are not talking just about suggestion boxes. I am referring to special projects and cross functional work groups to establish innovation in products, service and operations.

Managers need to make it clear that this is not a one off; to create sustained motivation, people must feel valued. Leadership has to be consistent and authentic in the way that it empowers teams to be create

Here are some ways of encouraging creativity and innovation:

Innovation       

1. Understand and know what the market wants, but know more about what your competitors are offering and how they behave.
Competitors of all kinds are the minimum benchmark for which to aim. Equalling the value of competitive offerings is rarely going to suffice – always ensure you are moving to stay ahead. Look at every weakness in competitor offerings and operations and use advanced brain storming tools such as ‘meta planning’ to develop and refine the winning concepts. To win you must find that point of difference and it’s usually a combination of ingredients which becomes – your winning recipe

2. Empower people to implement their innovations.

3. Make it clear that a business must always rethink, reposition, invest and develop its products and services.
NEVER stand still. Even those lucky enough to have patent or intellectual property protection must seek to acquire more advantages. If in any doubt about this then compare the car manufacturers on the road today with those of thirty years ago. GM laughed at the Japanese cars with their floral carpets and tiny engines. England was the undeniably solid centre of motorcycle production.

4. The customer is always a good start point for innovative thinking and should be a central focus for the whole business.
The customer and their relationship is central to business success. Do not rush to copy some competitors’ ways of caring for customers (e.g. automated telephone services!). Develop new ways to engage with customers in a way that customers want. They will repay you over and over. This is how Virgin took so much business away from the likes of Qantas

5. Treat internal employees as customers and friends.
The best innovation can come from co-operation between employees – this is an effective way of bringing out entrepreneurs. Identify and appoint innovation ‘champions’ around the business. These people will be the leaders on innovation development and manage the process. They must drive the culture.

6. Any function has scope for innovation – always.
HR, finance, customers service, manufacturing, legal, they all must innovate and an innovation culture that embraces all the functions will be a better joined up organisation.

7. Lead people to look externally for inspiration and don’t be afraid to steal other people’s ideas.
Some of the best ideas and simplest innovations are from businesses that already have had such a drive or survived times of stress. Don’t reinvent the wheel copy the world’s best practice then improve it.. Sometimes copying is the best route. However, copy it, and then improve it. Look at how the Japanese destroyed the UK motorcycle industry, they initially copied the UK and then made the products better.

8. Managers should promote external focus from all departments.
Many businesses suffer from internalism and parochialism. They stunt growth, innovation and sap energy. Assume that your business could be killed off by new entrants to the market or new innovations – people or technology based. Get people to think the un thinkable, develop thinking around scenarios that may seem unrealistic. In the 1960’s Black & Decker was the world’s largest and most trusted power tool maker. Which of the analysts and business commentators wrote or though in 2007 the major global banks would fail, that the system was unsupportable and a crash inevitable.

9. Lastly, companies must look forward, and by looking forward I mean 360 degree vision and a strategy to see through it. Most look back when setting budgets and design parameters.
Create a ‘can and will do’ rather than ‘can’t do’ culture. There are ‘no but’s’; only ‘yes and’

In the end, innovation is an state of mind. Train your key people to think and see differently, search every day for the new, the better, form, function, value and service. This is where Steve Jobs was masterful in transforming not only an industry which he had helped create but in transforming the culture of a major global enterprise.

The value of leadership and empowering your management is enormous and in truth no one has a choice in the matter. Everyone must adapt, change and innovate and we can all with training, help and enthusiasm become entrepreneurs.

Empowering employees to be innovative and creative, and encouraging a ‘can do’ attitude can reap rewards for everyone – whether monetary or reward based – and companies that do this are more likely to survive the recession.

A new show on the ABC called Redesign My Brain, hosted by Todd Samson, shows just how adaptable to new ideas, concepts and skills our brains are.

It’s been said so many times but the answer is to look out of the box or in more 21st century terms constantly look beyond the horizon and use 360 degree vision and thinking.

The Barking Mad Blog

SME Advice with bite!

13 October 2003

http://wp.me/p401Wv-73

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